For law or money
Albert Mushai, with a contribution by Professor Robert W Vivian, looks at an interesting battle between economists and lawyers in the management of the Asbestos Relief Trust
Occupational health and safety litigation in South Africa has been limited, essentially because the Compensation for Occupational Injuries and Diseases Act (COID) prevents employees from suing their employers. The Constitutional Court decision of Thembekile Mankayi versus Anglogold 2011, however, uncovered a previously unknown gap in the legislation.
Closely allied to the issue of litigation is a problem arising from economic theory, called the Principal-Agent problem. Economically speaking, it can be argued that it is the most pervasive and intractable economic problem in the world. It has many manifestations and many labels, but, for the purpose of this article, Principal-Agent will do. Further, the Principal-Agent problem, as recognised today, bears little resemblance to the way it was originally formulated.
The Principal-Agent problem arises where the Agent purports to act for, and in the interests of, the Principal, but, in reality, the Agent acts contrary to his mandate; often acting for himself, for his own benefit and usually against the interests and benefit of the Principal.
As indicated, the problem is pervasive. It exists in every field of economic activity; it’s sometimes called a conflict of interest. At other times it can be called regulatory capture, a moral hazard, adverse selection – and so on. The Agent will always claim to be acting in the interests of the Principal, but the facts will reveal a different picture.
Lawyers also recognise a Principal-Agent relationship, but are more conservative. They believe the Agent will act in terms of the mandate. Lawyers are more trusting than economists and they have a much narrower concept of the Principal-Agent relationship.
Take a simple example: In a democracy, the people (Principals) elect representatives (Agents). The people believe their representatives will act in their interests. However, once elected, their Agents quickly use the system for their own benefit.
When the Principals complain, after witnessing the opulent lifestyle of the Agents; who are driving multi-million rand cars, flying first class around the world, spending hundreds of millions on their private houses, with armed guards pushing the people out of the way – and so on, they are told the wealth will trickle down; yet it never does.
And so, the Agents do very well at the expense of the Principals. In 1776, Adam Smith pointed out that the division of labour was the most efficient way for an economy to function. Today the division of labour is widespread. There are Agents everywhere. With the division of labour, however, comes an unintended consequence; the Principal-Agent problem.
Not much thought has been devoted to the Principal-Agent problem in litigation, but the very limited occupational-health litigation in South Africa seems to demonstrate the Principal-Agent problem may well be alive and well within litigation framework.
In 1997, complex asbestosis litigation was launched in England against Cape plc, claiming on behalf of South African victims of asbestos. As the litigation progressed, it became clear that Cape plc was in a precarious financial position. This was reflected by its share price, which, in Oct 2001, had plummeted to £0.11 per share. It became clear that, even if the case was won, Cape plc probably would not be able to pay as it would possibly follow other former asbestos manufacturers into insolvency.
Almost seamlessly, the litigation then switched to an action in South Africa, against the South African company Gencor. At the time, Gencor was in the process of restructuring to form what would become BHP Billiton. What could possibly be long drawn out litigation would delay the restructuring and, in 2003, Gencor decided to avoid litigation and to settle the matter out of court. Eventually, trusts were established for the benefit of the victims of asbestosis. One of these trusts is the Asbestos Relief Trust.
The 2013 Annual Report of the trust reveals an interesting development taking place. The purpose of the trust is for the benefit of those who suffered from asbestosis (the Principals). Potential beneficiaries needed to contact the trust and apply for compensation. The trustees (the Agents) would then ensure that, if they met the requirements, they would be compensated from the funds held in trust.
The trust could expect to receive many applications, all of which would have to be considered. This indeed happened. As of the April 28, 2013, 14 500 enquires had been received. During the litigation, the lawyers claimed to be acting for
7 500 registered claimants against Cape plc and, of course, once Gencor became party to the litigation, additional litigants could be added.
The problem is that once the trust was established, many who did not qualify also approached the trust for money. These included some of the original 7 500 plus, who joined the register of litigants, although they did not qualify for compensation.
Of course these applicants had to be turned away. The trustees (Agents) had no option but to reject these claims, since they did not fall within the parameters specified in the trust deed. By doing so, the agents would be protecting the interests of the real victims of asbestosis, the Principals, as expected by the lawyers.
Thus, it seemed as though the economists would be wrong. Agents do indeed act in the interests of the Principals. In this case, the trustees were doing what is legally required of them. In the Principal-Agent framework, they were acting in terms of their mandate. The Principal-Agent problem in economics, however, warns that Agents will not keep within their mandate and that funds will be used for purposes outside of the terms of the mandate.
It was not long after the formation of the trust, that people, who had put their names down as claimants, started to demand money – even although they were not victims of asbestosis. Trustees (Agents) continued to refuse to make any payments to these claimants.
During May 2012, the trustees were requested to meet with the deputy minister of mineral resources in Pretoria. At the meeting, it was suggested that the trust pay R30 million to individuals, who did not meet the criteria, as an ex gratia payment.
The payment was supported by the office of the premier of Northern Cape. And so the Principal-Agent problem of economics appears. In this case, the trustees continued to refuse to make the payments. On the face of it, it looked as though the economic Principal-Agent problem would not arise, and the lawyers would be correct.
In terms of legislation (the Trust Property Control Act), trusts fall under the control of the Master of the High Court. In October 2012, the trustees were summoned to the office of the Master of the North Gauteng High Court, in Pretoria, for a meeting. Representatives of the deputy minister and office of the premier were in attendance. The meeting was presided over by the Chief Master of the High Court.
Once again it was indicated that the trustees should pay over funds to people, who did not qualify in terms of the trust deed. Without prior notice, the Chief Master then advised that he was going to unilaterally appoint two additional trustees. Their appointments were not made at the request of the trustees (Agents) or the beneficiaries (Principals), or in consultation with them. On the August 5, 2013, the Master appointed the two additional trustees.
It now remains to be seen whether the trust will start distributing funds that are not authorised by the trust deed. The economic Principal-Agent theory indicates that this may well happen. Lawyers will say it cannot happen. It will be interesting to see who is correct; the lawyers or economists!
Legally Speaking is a regular column by Albert Mushai from the school of Economics and Business Sciences, University of the Witwatersrand. Mushai holds a master’s degree from the City University, London, and was the head of the insurance department at the National University of Science and Technology in Zimbabwe before joining Wits University as a lecturer in insurance.